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E-Mailbag Monday: Looking Back at the Past Few Weeks

For today's Email Bag, I will answer the one question that I have been receiving with great frequency: Is it over for Net stocks?

Reply: There is an old saying: "In a recession, your neighbor is out of work. When there is a depression, you are out of work." For all Net investors, it has been a depression.

While a 10 percent decline is considered a correction, a 20 percent decline is termed a bear market. As for the NASDAQ, the index is 32 percent off its all-time high. Yet, this does not capture the carnage of the Internet sector, which has been punished the most.

There must be reasons for such a sell off. And, in the past few weeks, there have been many. There was the adverse judgment against the mighty Microsoft, the epitome of high-tech. There has been Greenspan's insistence on a hawkish anti-inflation stance on interest rates. And so on . . .

But we are likely never to know the real reasons. The markets are highly complex. After all, academics are still trying to figure out what precipitated the crash of October 1987.

Despite this, there are many lessons to be learned. First of all, wise investment requires diversification. Yes, buying Old Economy stocks is boring. You won't get rich overnight. Yet, when you are planning for your future, you need to have a well thought out portfolio that attempts to optimize rate of return and risk.

Margin should be used sparingly. It should not be a way to "swing for the fences." When markets collapse, margin can be very punishing. It usually means an investor cannot take advantage of bargains.

Let's take a look at some other things that may result from the NASDAQ meltdown:

Business Model: I have been covering IPOs since Netscape dazzled the world with its offering. I have read innumerable times in SEC filings that a company would not see profitability in the "foreseeable future." Well, this will be less common. Investors want business models that make sense. They want profitability that is foreseeable.

More Blow Ups: Another haunting phrase is "going concern." This is when an auditor deems a company to be running out of cash. Cash is king. Yet, as the equity markets get selective, more Net companies will run out of cash.

Vulture Funds: Incubators and VC funds have been the hot things. Now, expect a plethora of vulture funds. Seeing the low valuations, these funds will specialize in restructuring struggling companies. Who knows, perhaps some of these funds will go public.

Privatization: Over the past few years, the financial markets have emphasized equity financing, such as in the form of IPOs and secondary offerings. However, it appears that there is an oversupply of equity. What next? One idea is for companies to go private. This will likely be done using debt. Of course, this only makes sense for those companies that have strong cash flows.

Another idea is for VCs to buyback the companies that they took public. VCs are currently flush with tremendous amounts of cash.

Finally, prominent investors may become big buyers. This was evidenced a few weeks ago when John Doerr and Jim Clark purchased $220 million Healtheon (HLTH) stock.

Blue Chip Net Companies: Even though the NASDAQ collapse has affected all stocks, the fact remains that blue chip Net companies still have plenty of cash and nice market capitalizations. For example, Amazon.com has a market cap of $16 billion. Don't you think they see some opportunities here? Actually, it would not be surprising to see Amazon.com buy the companies that it has invested in, such as Drugstore.com (DSCM),